At the beginning of August, 2022, the "second step" of the law to reduce cash payments in Israel entered into effect, lowering the cash payment cap allowed in Israel for a business owner to merely ILS 6,000. The law was enacted back in 2018 with the aim of reducing the use of cash in favor of using other means of payment, so that the authorities, and especially the tax authorities, can monitor the movement of funds in the market and reduce the phenomena of tax evasion, money laundering, drug trafficking, etc.
However, the question arises as to whether the law is even necessary. It is abundantly clear to everyone that even without the law, with the advancement of technology and the development of various electronic payment methods, from credit cards to payment apps and digital wallets, there is a consistent decrease in the use of cash around the world. In Israel especially, where the proportion of cash in the total GDP is low compared to many developed countries, it is not certain that limiting the use of cash is the solution needed for the war on the “Shadow Economy”.
However, the 2014 Locker Committee report, which actually led to the legislation in question, found that a fifth of the economic activity in the State of Israel is unreported. This failure to report leads to massive losses, estimated at tens of billions per annum to the State, which, inter alia, imposes a heavy burden on the law-abiding taxpaying public. In addition, and despite the global downward trend in the use of cash, during the Covid19 period there was a halt and reversal in the aforementioned trend, as people tended to pay cash and many small businesses continued to provide services against cash during lockdowns, a fact that indicates that this is a “fragile’ trend which is put in danger during crises, both globally and nationally.
The current amendment to the law is significant in two ways: one, it significantly lowers the amount allowed for cash transactions from ILS 11,000 to only ILS 6,000 (with certain exceptions) in a transaction between a person and a business and to only ILS 15,000 between private individuals; second, it allows the imposition of fines, ranging from 10% of the transaction and up to 30% of the excess amount, not only on the business who receive the cash, but also on the customer. The law prohibits splitting payments and applies to all types of transactions, including payment of wages and rent, but does not apply to charitable organizations and the granting of gifts and donations, including between family members. The amount in the law even includes VAT and all the things accompanying the transaction - so one cannot separate, for example, in a purchase transaction, between the VAT component or surcharges for transport or assembly and avoid the legal obligation in this way.
However, it should be noted that there are several issues with the law. First, the law is subject to criticism because it raises concerns about the harm it causes to vulnerable populations, including refugees, the elderly and freelancers, some of whom have limited access to digital means of payment and some of whom may be harmed because the currently allowed amount is lower than the average wage in the economy. In addition, while it makes it difficult for the public and small businesses in particular, it benefits the banks and credit companies as it will lead to an increase in the use of credit cards and bank transfers that charge hefty fees from the public for use.
In addition, and from an operative point of view, it is unclear how the Tax Authority plans to enforce the law. In the past, when the threat of fines was on business owners only, the Authority could carry out enforcement through audits of businesses. It is unclear how the Authority intends to locate customers who made cash payments, a transaction which by its very nature does not leave a "digital trail" and does not necessarily include the customer's details in a way that allows for simple tracking.
Despite the aforementioned difficulty, it is recommended not to rely on the fact that the Authority will have difficulty locating violators, but to make sure to examine in each and every case whether a cash transaction meets the conditions of the law and not to risk heavy fines unnecessarily.